Q: What Is a High Deductible Health Plan (HDHP)?

A high deductible health plan (HDHP) is a type of health insurance plan that has lower premiums but higher deductibles than a more traditional plan. It’s also the type of plan you need to have if you want to be able to contribute money to an HSA.

Now, you might think: my plan totally has a high deductible—that counts, right?

Not necessarily: The term “high deductible health plan” means more than just having a high deductible. An HDHP needs to conform to specific rules laid out by the IRS in order to be considered an HSA-eligible plan.

So, what qualifies as a high deductible health plan?

A qualified HDHP can be combined with an HSA. There are three rules set by the IRS that HDHPs have to follow:

  1. You pay 100% until you meet the deductible: Unlike plans that have copays for office visits and prescriptions from the get-go, you have to pay the full cost of care for everything except for qualified preventive care until you hit your deductible. So if you go to the doctor when you have the flu and before you meet the deductible, you’ll have to pay the full visit amount and not just a copay or coinsurance bill.
  2. There’s a minimum deductible amount: For 2023, your deductible must be at least $1,500 if it’s only you on the plan, and at least $3,000 if you have any other family members on the plan. That means you’ll have to pay at least $1,500 in medical costs before your plan kicks in and starts paying for your care.
  3. And there’s a maximum on out-of-pocket costs: In 2023, your individual out-of-pocket costs can’t be more than $7,500. For a family, the maximum is $15,500. So as long as you receive qualified care from in-network medical providers, you won’t pay more than those amounts during the year. Out-of-pocket expenses include payments you make for healthcare services as part of your deductible, co-insurance, and copays. Be sure to read and understand what’s included in your plan’s out of pocket maximum—and what’s not. The cost of your health insurance premium, procedures that are not covered by insurance (e.g. cosmetic procedures) and out-of-network care typically are not calculated as part of your out-of-pocket maximum.

What are the benefits of a high deductible health plan?

There are a few reasons you might get a high-deductible plan:

  1. The monthly premiums are generally lower than those of more traditional plans that offer copays for office visits. If you rarely need healthcare services, an HDHP may be a less costly way to get coverage.
  2. If you have an HDHP, you can contribute money to an HSA, which has tax benefits. Money from your paycheck that is allocated to your HSA is generally considered pre-tax, and qualified medical expenses are also typically not taxed when those funds come out of the HSA. For 2021 the maximum amount that folks on an individual plan can contribute to an HSA is $3,600. For those on a family plan, the maximum contribution for 2021 is $7,200. Talk to your CPA and check your plan for details.
  3. As with other health plans, even though you’ll pay “full price” for care before you meet the deductible, the amount you pay will be the discounted price negotiated by your health insurance carrier. For example, let’s say you think you have the flu and you go to your primary care doctor for a checkup. In this hypothetical scenario, your doctor’s full rate is $350 for a visit. Your insurance carrier will typically negotiate a better rate. In this case, ABC Insurance Co. negotiates the bill down to $150. You’ll have to pay the full $150 if you haven’t already met your deductible, but hey—at least it’s not $350!

Why would an employer offer an HDHP?

There are several reasons why your business might want to offer an HDHP to employees:

  1. Offering an HDHP makes employees eligible for saving pre-tax money in an HSA. That helps reduce their tax burden and provides them with an interest-bearing account that they can use for medical expenses.
  2. In addition to offering an HDHP, many employers opt to make contributions to their employees’ HSAs. This can be an attractive benefit for recruiting and retaining employees, and the contributions are pre-tax for both the employer and the employee.
  3. HDHPs can be a way for employers to keep insurance costs in check. An HDHP—even combined with employer contributions to employees’ HSAs—is often less expensive in terms of monthly premiums than a more traditional health plan.

Can you give me an example of how an HDHP works?

Sure! Meet Lynn. She has an HDHP and hasn’t met her $1,400 deductible yet. That means she has to pay for all of her medical expenses out of pocket until she hits the $1,400 mark. After that, her insurance benefits kick in.

She’s feeling sick and goes to the doctor, who bills $200 for the visit. Lynn’s insurance plan has a negotiated rate of $140 for the office visit, so the doctor reduces the bill down to that amount.

Lynn pays the $140, and it counts towards her deductible. She still has to pay $1,260 in medical costs for the year before her health plan will start paying for her care.

Unfortunately, after recovering from the aforementioned illness, Lynn slipped on a banana, fell, and shattered her shoulder. (Poor Lynn!)

She got herself to an in-network hospital’s urgent care center and received all the care she needed for her shoulder. A few weeks later, she got the bill. The full cost of her urgent care services was $12,000!  Lynn saw that number and thought she was going to have a heart attack. Luckily, she took a deep breath and kept reading. Turns out, it was a pricey fall, but she wasn’t on the hook for $12,000. Lynn’s insurance carrier negotiated the rate down to $5,000.

You’ll recall that Lynn has a deductible of $1,400 and she already paid $140 earlier in the year, so she’s required to pay $1,260 to satisfy her deductible ($1,400 – $140). Now, her annual out-of-pocket maximum is $7,000 and she hasn’t spent that much yet, so she’s still responsible for her portion of coinsurance for her urgent care visit. Lynn’s coinsurance is 10% for covered, in-network services.

10% of the $5,000 bill is $500, so Lynn pays a total of $1,760 ($1,260 remaining on her deductible + $500, which is 10% of the $5k bill = $1,760.)

Since Lynn contributed the maximum annual amount to her HSA ($3,600), she’s able to pay her portion of the bill with her pre-tax HSA funds because slipping on a banana peel and shattering your shoulder is totally a qualified medical expense for Lynn.

Oh, and there’s more.

Lynn does dangerous stunts for aspiring actors in low-budget action movies as a living. She often dismisses safety guidelines and as a result she gets hurt frequently. For the first several months of the year, she was at a doctor’s office or urgent care at least every other week. Then she got cancer. She’s fine now, but she needed a few surgeries. We don’t need to go into the details—the point is that Lynn reached her $7,000 out-of-pocket maximum by September. So all of her covered, in-network medical needs from September – December were paid 100% by her insurance.  

After Lynn’s out-of-pocket maximum had been met, Lynn had a voluntary nose-reduction procedure. Lynn thought that if her nose was a bit smaller, she would get into fewer accidents. We’re not entirely sure how she came to this conclusion; apparently some of her stunts involved her face and her nose was getting in the way. Lynn felt that this justified her nose surgery as a medical necessity, but her insurance carrier said it was cosmetic, so she had to pay for the entire cost herself, even though she had already met her annual out of pocket maximum and the procedure was performed by an in-network surgeon.

As a very brief aside, since we know you’re invested in the story of Lynn: she did call her CPA to see if the nose surgery might be a tax write-off because Lynn runs her own business and wants to claim it as a business expense. We don’t know what Lynn’s CPA said.

OK, back to HDHP insurance plans, the point here is: make sure to read and understand your insurance carriers terms and conditions—and if in doubt, you may want to call them before scheduling non-emergency procedures.

Still not sure whether an HDHP is right for you and your business? Chat with a broker to learn more and decide if an HDHP is right for you.

This post was originally published on January 28, 2019.

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